If the terms of trade increase then, ceteris paribus:
A) imports will fall.
B) imports will rise.
C) exports will rise.
D) exports will fall.

Question

Quizplus · Accepted Answer

If the terms of trade increase, it means that a country can now get more imports for a given quantity of exports. This would make exports more attractive, leading to a rise in exports. Other things being equal, this would also lead to an increase in national income and expenditure, which would raise demand for imports. However, since the terms of trade have improved, the increase in exports would outweigh the increase in imports, leading to a net increase in exports.

If the Terms of Trade Increase Then, Ceteris Paribus